Delfi - RHB Invest 2020-04-27: Disruption From COVID-19; Still BUY

DELFI LIMITED (SGX:P34)

Delfi - Disruption From COVID-19; Still BUY

Maintain BUY, new SGD0.74 Target Price from SGD1.68, 19% upside, c.3% FY20F yield.
We expect Delfi (SGX:P34); to see some earnings disruption as the rate of COVID-19 infections worsens in Indonesia. We slash FY20-22F earnings by 40-50%, largely due to lower sales and margins from declining consumer sentiment and the IDR depreciation.

Delfi is trading at 16x FY20F P/E, which is at a steep discount to its Indonesian peer average of c.23x forward P/E.

1H marks the seasonally stronger period for Delfi, as sales increase – due to festive seasons and occasions ranging from the Lunar New Year to Valentine’s Day and Lebaran. However, due to the COVID-19 pandemic, the Indonesian Government has banned residents of affected cities from leaving for their hometowns during Ramadan – this took effect on 24 Apr. The Government also banned communal feasting after breaking fast. As a result, we expect the celebratory mood to be dampened, as residents are encouraged to stay at home and embrace a quiet Ramadan.
While 1Q20 revenue may still be healthy, due to Valentines’ Day-related sales and early sell-in activities with trade agents in anticipation of Lebaran, we think revenue for 2Q20 may be severely impacted, with slower sales recorded.

The IDR has depreciated by 11% YTD, mainly due to the decreased appetite for emerging market assets during times of volatility. 72% of Delfi’s sales are from the Indonesian market, and collected in IDR terms. However, the majority of its raw materials are denominated in USD.
Although commodity prices have tapered down, the sharp IDR depreciation will likely erode GPM. Adjusting sales prices at present will also be difficult, due to the weaker demand.

We expect Delfi to continue generating positive free cash flow despite the softer sales outlook, as its non-cash depreciation and amortisation charges more than offset capex requirements. It also has a strong balance sheet, with no long-term debt obligations. Net gearing ratio is almost at 0%.

We expect earnings to gradually recover in FY21, assuming that the pandemic tapers off in 2H20 and the IDR rate normalises.
New product launches in the value space would also help propel growth, once the pandemic is brought under control.
See Delfi Share Price; Delfi Target Price; Delfi Analyst Reports; Delfi Dividend History; Delfi Announcements; Delfi Latest News.
After adjusting our forecasts, Delfi is trading now at 16x FY20F P/E – which is still at a steep discount to its Indonesian-listed peers that are trading at c.23x FY20F P/E.
Key risks include worsening of the COVID-19 contagion in Indonesia and globally, and the slow recovery in consumer purchasing power.

Juliana Cai RHB Securities Research | https://www.rhbinvest.com.sg/ 2020-04-27

SGX Stock Analyst Report BUY MAINTAIN BUY 0.74 DOWN 1.680